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Moody's upgrades Ally Financial Inc.'s corporate family rating to Ba3 from B1.

Summary: Ally Financial Inc. is a provider of automotive financial services with $151 billion in total assets at June 30

Moody's Investors Service upgraded the

corporate family rating (CFR) of Ally Financial Inc. to Ba3 from B1 and

confirmed its other long-term and short-term ratings, including its

senior unsecured rating of B1 (see detailed list below). The outlook for

the ratings is stable.

RATINGS RATIONALE

The upgrade of Ally's corporate family rating follows the U.S. Bankruptcy

Court's approval of ResCap LLC's (unrated) Chapter 11 plan, which

releases Ally from mortgage-related creditor claims originating from its

ownership of ResCap. The upgrade also reflects the improved quality of

Ally's capital after the firm privately placed $1.3 billion in new common

shares and repurchased $5.6 billion of mandatorily convertible preferred

stock (MCP) from the US Treasury. Ally's prospects for strengthening

financial performance by reducing funding and operating costs also

support the upgrade. The confirmation of Ally's senior unsecured rating

at B1, one notch lower than Ally's CFR, reflects the structural

subordination of Ally holding company creditors to those of growing

subsidiary Ally Bank.

The Bankruptcy Court's decision makes official the deal that Ally struck

in May to obtain ResCap creditor liability releases in consideration for

a $2.1 billion payment. Ally reached separate agreements with the FHFA

and FDIC settling all pending litigation and claims relating to ResCap's

sale of poorly performing residential mortgage loans to Fannie Mae,

Freddie Mac and FDIC-insured banks. Moody's expects that resolution of

these contingent obligations will broaden Ally's appeal to fixed-income

and equity investors. This could give new impetus to the US Treasury's

efforts to sell its shares in Ally, thereby providing the means to repay

the remaining amounts Ally owes to the US government for support,

totaling $17.2 billion, it received during the financial crisis. Ally

has paid the US Treasury $12.2 billion to date. Repayment of government

support that leads to improved access to long-term capital would be

positive for the firm's credit profile.

Ally has taken a number of steps to strengthen capital and streamline

operations. In November, Ally privately placed $1.3 billion of common

shares and used the proceeds to repurchase $5.6 billion of MCP held by

the US Treasury, thereby improving the quality of the firm's capital. The

repurchase also eliminated the MCP's 9% dividend, increasing Ally's

ability to retain earnings and reducing its total cost of capital. Over

the past year, Ally has sold non-core international auto finance

operations to General Motors Company (Ba1 stable), resulting in a return

of capital to support the MCP repurchase and support its US auto finance

operations. Taken together, the transactions raise Ally's pro forma Tier

1 common ratio to 9.5% from 7.9% at September 30. In late November, the

Federal Reserve approved Ally's Comprehensive Capital Analysis and Review

(CCAR) plan, reflecting the firm's stronger capital position.

Operating performance in Ally's core auto finance business has also

improved over the past several quarters. Liability management actions

and transition to deposit funding have lowered Ally's cost of funds and

expanded its net interest margin. Although Ally is well positioned in its

sector as the top lender to GM and Chrysler dealers and car buyers, the

company faces growing competition from increasingly aggressive bank and

non-bank lenders eager to increase their presence in the auto finance

sector. To preserve average asset yields, Ally has grown used car

lending, leasing and lower credit-tier volumes, which represents an

expansion of its risk appetite toward pre-financial crisis levels. An

unexpected deterioration in the firm's asset quality performance would

constrain its ratings.

Ally's senior unsecured rating of B1 is one notch lower than its CFR,

reflecting the structural subordination of parent creditors to the

creditors and depositors of subsidiary Ally Bank (unrated). Ally has

continued to grow and strengthen Ally Bank, which at September 30

comprised over 60% of Ally's consolidated total assets and 44% of its

funded liabilities. Ally Bank has achieved good brand recognition,

established a relatively stable online deposit base, and expanded its

suite of product offerings. Growth of the bank has diversified and

lowered the cost of Ally's funding, but the transition of earning assets

into the bank results in parent senior creditors having weaker earning

asset coverage than the bank's depositors. As partial offset, Ally has

reduced parent company leverage while maintaining a strong liquidity

profile.

Ally's rating could be upgraded if the company sustainably strengthens

operating profitability while maintaining strong franchise positioning

in dealer and retail auto finance and makes further strides repaying

government support.

Ally Financial Inc. is a provider of automotive financial services with $151 billion in total assets at June 30, 2013. Ally Bank, with total

assets of $92 billion, offers a variety of savings and checking account

products.

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Publication:EMBIN (Emerging Markets Business Information News)
Date:Dec 22, 2013
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